Maybe Microsoft Should Stalk Different Prey

Sunday

Feb 24, 2008 at 3:46 AM

In pursuing Yahoo, not SAP, the software giant may be moving far from what it knows best.

RANDALL STROSS

OVER the years, Microsoft has pummeled countless rivals, including the superheavyweight I.B.M. But it has never faced a smaller foe as formidable as Google. The tale of the tape gives Microsoft a $100 billion advantage in market capitalization, but it counts for little: Google appears to be its superior in strength, speed, smarts.

Having exhausted its best ideas on how to deal with Google, Microsoft is now working its way down the list to dubious ones — like pursuing a hostile bid for Yahoo. Michael A. Cusumano, who has written several books about the software industry and about Microsoft, is not impressed with Microsoft’s rationale for its Yahoo offer. He said the bid seemed to be a pursuit of “an old-style Internet asset, in decline, and at a premium.”

Determined to match Google in search and online advertising, Microsoft has managed to overlook a plain-vanilla strategy, the oldest one in the book: build on its own strengths. What it does best is to sell software to corporations, for all sorts of applications, visible and not so visible, at a handsome profit.

If Microsoft thinks this is the right time to try a major acquisition on a scale it has never tried before, it should not pursue Yahoo. Rather, it should acquire another major player in business software, merging Microsoft’s strength with that of another. This is more likely to produce a happier outcome than yoking two ailing businesses, Yahoo’s and its own online offerings, and hoping for a miracle.

For an illustration of how Microsoft could select targets more judiciously, Mr. Cusumano, who is a professor at the Sloan School of Management at the Massachusetts Institute of Technology, pointed to the Oracle Corporation’s strategic acquisitions and its prudent use of capital to “roll up firms with similar products and customers to its own.” With impressive regularity — 13 strategic acquisitions in 2005, another 13 in 2006 and 11 in 2007 — Oracle has picked up key products and customers while avoiding an “oops” slip, venturing too far away from its core business, or paying too much. At no point along the way has it acted in a fit of desperation.

Last month, Oracle pulled in another major prize, BEA Systems, a leading software company, for about $8.5 billion. You’ve probably never heard of BEA: it’s doubly obscure, producing the behind-the-scenes infrastructure that large companies use to build behind-the-scenes software systems for their entire business, or “enterprise software.” Both Oracle and BEA are based in Silicon Valley, but their side of the street is not lit by klieg lights and does not get the same attention as the Googles and Yahoos.

And, to be honest, it’s not much fun hanging out on the enterprise side of the software business. BEA says its software helps organizations “ensure that business processes are optimally defined, managed, executed and monitored.” Unless you’re playing Business Jargon Bingo, it’s hard to sit still and remain attentive. You have to admire Oracle’s ability to remain focused on the business that serves business and to not be distracted by the buzz of the Web crowd gathered across the street.

Microsoft does business software well. Approximately half its revenue comes from business customers for its e-mail infrastructure, database systems, developer tools, Office productivity applications and other mainstays. It has also assembled, through acquisitions, a fledgling line of enterprise software that it calls Microsoft Dynamics. Microsoft would like Dynamics to be viewed as competing head to head with the No. 2 name in enterprise software, Oracle, or the No. 1, SAP of Germany. For the moment, however, Microsoft Dynamics’ parity with those big names is nothing more than wishful aspiration.

Professor Cusumano has a suggestion: Rather than acquire Yahoo, Microsoft should pursue SAP.

It’s not an outlandish idea. The two companies held merger talks in late 2003, and perhaps since then, too. Microsoft is in an enviable position: it is a nearly universal presence in corporate data centers, and large enterprise customers are arguably the best customers a software company can have. Clients pay very dear prices for the complex, semicustomized software that runs their business. And once they’ve got their systems running — a process that can take years to complete — they aren’t inclined to change vendors lightly.

A few dozen well-paying Fortune 500 customers may actually be more valuable than tens of millions of Web e-mail “customers” who pay nothing for the service and whose attention is not highly valued by online advertisers.

Today, SAP’s market capitalization is about $59 billion, and a sizable premium to get a deal done would send its price well north of that. Microsoft cannot put both SAP and Yahoo in its shopping cart, deals that together might run well over $120 billion. Microsoft must pick one or the other.

Suppose that Lawrence J. Ellison, the chief executive of Oracle, were the head of Microsoft and was doing the shopping. Which deal would he choose? Past experience suggests that it would not be Yahoo. That acquisition would bring little but duplication headaches — and no large enterprise customers.

It’s amusing to note that the most Larry-like choice, Microsoft’s acquiring of SAP and leaving it alone as an autonomous division to avoid a cross-cultural integration fiasco, is the course that would be most discomfiting to Oracle. Frank Scavo, president of Computer Economics, an information technology research firm, in Irvine, Calif., said that “a Microsoft-SAP combination would be Oracle’s worst nightmare.”

Google would not be happy with a conjoined Microsoft and SAP, either. It has made a pro forma expression of its own opposition to a Microsoft-Yahoo merger, but we can speculate that it may be cheering that deal on. Working in Google’s favor are the hostile nature of Microsoft’s bid, the colossal potential for integration problems, and organizational paralysis in, and exodus of talent from, Yahoo.

But were Microsoft to turn and head in SAP’s direction, Google would have reason for concern. Whatever strengthens Microsoft is bound to influence, later if not sooner, its continuing competition with Google. For its own part, Google is keen to expand its foothold inside large companies. Last year, it acquired Postini, whose software filters corporate e-mail. Google has not done so well with corporate customers on its own, however. Google Apps has conspicuously failed to win adoption quickly.

If Microsoft is to rededicate its attention to its most valuable assets, business customers, a prerequisite is dropping its ill-advised bid for Yahoo. And to find the best acquisition strategy, ask, “What would Larry do?”

If Microsoft tries to fight Google with wobbly legs, scared witless, it will lose.

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